Motorcycle and financial services Essay

Abstract The strength of Harley-Davidson’s brand and dominant market position give the firm a wide moat, in our opinion. However, weaker consumer spending and tight credit markets are presenting the firm with some significant near-term challenges. In addition, we believe the firm must carefully broaden the appeal of its brand to secure its long-term success. Harley-Davidson is a cult brand that resonates around the world. There are more than 1 million members of the Harley Owners Group, and every year several hundred thousand Harley fans attend biking events at Daytona, Fla. , and Sturgis, S. D. It’s no wonder that over 50% of Harley’s revenues are generated from repeat sales and these sales are at premium prices to other motorcycle brands. In addition, with almost a 50% share of the U. S. market, Harley also achieves economies of scale greater than most of its competitors. A Harley is not just a bike it is an investment. brand loyalty, its economies of scale, and its network of mostly exclusive dealers have created significant barriers to entry, and as a result, Harley has achieved historical operating margins of over 20% and returns on invested capital of over 40%, excluding the financial services segment. JIT Principles JIT is an operational strategy which helps in making inventory levels lean. An organisation which goes for synchronous manufacturing incorporates JIT to have lower inventory levels. Synchronous manufacturing encompasses techniques of JIT to achieve the target. Organisations which have implemented JIT and are using synchronous manufacturing have a very lean system. It has minimum wastage and the highest possible quality. These organisations are cost effective and generally have higher margins than their competitors. This results in higher level of efficiency in the organisation and a better work environment. BPI helps in management of inventory and related operations. It is very important that organisation understand the importance of new methods and reengineer their processes in line with the requirements. The minimum level of inventory which is required as WIP is determined by the organization and then control efforts are put in so that there is always the minimum level available and it would never cross the maximum level. This is done because one cannot hold high levels of inventory because it comes at a very high cost and is an occupational and can be a operation hazard. The strength of Harley-Davidson’s brand and dominant market position give the firm a wide moat, in our opinion. However, weaker consumer spending and tight credit markets are presenting the firm with some significant challenges and we believe the firm must carefully expand the appeal of its brand to secure its long term success. Harley-Davidson is a cult brand that resonates around the world. There are more than 1 million members of the Harley Owners Group, and every year several hundred thousand Harley fans attend biking events at Daytona, Fla. , and Sturgis, S. D. It’s no wonder that over 50% of Harley’s revenues are generated from repeat sales and these sales are at premium prices to other motorcycle brands. In addition, with almost a 50% share of the U. S. market, Harley also achieves economies of scale greater than most of its competitors. The intensity of the firm’s brand loyalty, its economies of scale, and its network of mostly exclusive dealers have created significant barriers to entry, and as a result, Harley has achieved historical operating margins of over 20% and returns on invested capital of over 40%, excluding the financial services segment. Despite its strong brand, sagging consumer spending on high-ticket items is likely to continue to depress volumes in the near term, and we expect the economic downturn to prolong the period of failing sales through 2010/11. The firm has already cut production in an attempt to trim costs in line with faling demand. in addition, just over half of Harley’s motorcycle revenues are derived from retail sales made on credit. We think that the lack of available funds on the wholesale markets and the shrinking of the number of qualifying customers will make it difficult for the company’s financial services division to continue to support retail sales by providing credit to customers. Harley must address some long-term challenges. The firm has been focused on a narrow demographic group (around 89% of customers are male) and the median age of Harley’s customers has been on a long-term upward trend. We believe that the firm must find ways to broaden the appeal of its brand without alienating its core customer base. Harley has grown in recent years in the international market , and revenues generated abroad have risen to 25% of total revenues in 2007 from 19% in 2004. Although the firm has recently introduced a performance motorcycle for the European market, I think that it may find it difficult to deliver customized products for overseas markets while supporting its brand franchise. Risk Harley’s revenues could be severely hurt by a further weakening of the global economy and increased reductions in consumer spending on high-ticket discretionary items, and the firm may not be able to securitize its receivables if the asset-backed security market is slow to recover. Harley’s sales are focused on a thin demographic segment: 35- to 54-year-old males. In our opinion, the firm must broaden its appeal in order to secure its long-term profitability, but any missteps in marketing its products to other demographic segments could damage the brand. Harley-Davidson’s brand resonates around the world, and it has particular strength in its key target market of 35- to 54-year-olds.   Historically, Harley has generated free cash flow at around 15% of revenues, allowing the firm to develop a strong track record of returning cash to shareholders through dividends and stock repurchases.   Through the downturn, Harley’s management has been careful to maintain spending on research and development and marketing, important steps in maintaining the strength of the brand, in our opinion. The firm has worked successfully with its network of dealers to significantly reduce dealer inventory over the last 12 months.   Harley’s core demographic, the baby boomer generation, is aging, and that’s likely to reduce demand for Harley’s products in the future. In order to mitigate the negative impact on revenues, the firm must improve its penetration in other segments. * Harley is likely to continue to face some severe short-term head winds, with anemic consumer spending likely to hurt revenues through 2010. The large inventory of used Harley motorcycles is likely to contribute to Harley’s near-term challenges, as a greater number of under-pressure consumers may opt for a cheaper used model in the secondary market.   The turmoil in the credit markets is likely to raise the cost of the short-term capital required to fund HDFS.   Despite raising the retail rate on its loans, I expect the operating margins of HDFS to come under severe pressure through 2009. HDFS may also find it difficult to raise financing for retail credit in the wholesale markets. This could restrict the number of loans the firm can make to customers and thwart the firm’s attempts to support retail sales volumes. Inventory Management in Harley Davidson Growth: Historically, the strong spending power of the baby boomers, Harley’s core demographic, has been favourable for the motorbike manufacturer. As the baby boomers age, however, I expect slowing domestic revenue growth to be only partially mitigated by international expansion. Profile: Harley-Davidson is the world’s leading manufacturer of heavyweight motorcycles, parts, and accessories. It sells the Softail, Sportster, Dyna, Touring, and VRSC models under the Harley-Davidson name, and it also manufactures the Buell brand. Harley-Davidson Financial Services provides wholesale financing to dealers and retail financing and insurance brokerage services to customers. Strategy: Harley leverages its strong brand to sell a broad range of motorcycling-related products. The firm is attempting to broaden its appeal to more demographic groups by expanding its product line-up. It is also focused on international expansion, and it has introduced a new performance-based bike in an attempt to increase its share in overseas markets. Management: I think the quality of corporate governance at Harley-Davidson is above average. I applaud the firm for splitting the chairman and CEO roles between two individuals, although I am concerned that the relationship between the two individuals serving in these roles may weaken the chairman’s ability to provide independent oversight. CEO James Ziemer’s career at Harley blossomed under the leadership of former CEO and current Chairman Jeffrey L. Bluestein. In addition, although nine of the firm’s 12 directors meet the NYSE definition of â€Å"independent,† a total of six of them have served on the board for over a decade, and I believe that their long-term relationships with management, together with some related-party transactions, may further compromise their independence. Having said that, the Harley-Davidson board does contain a solid range of legal, accounting, and executive experience. Management compensation is skewed to long-term incentive components, and I think that this aligns the interests of the management team with those of shareholders. The firm has a strong track record of returning cash to shareholders, both through dividend disbursements and share buyback programs. Harley Reports Lower 3Q Earnings I am leaving our fair value estimate for Harley-Davidson in place following the release of third-quarter earnings, which were in line with our expectations. Revenue fell 8% year over year, to $1. 42 billion, as the economic downturn hurt retail sales volume, which declined 14%. The bright spot was international sales, but only a small part of the 11. 3% rise in international revenues was attributable to volume increases; most of the increase was caused by favourable currency movements. At Harley-Davidson Financial Services, the customer finance division, third-quarter earnings fell 28% from the same period last year, to $35. 6 million, because of lower securitization income and the write-down of some finance receivables held for sale. I was pleased to note that the firm is being proactive in securing alternative sources of funding for the finance division, in the event that it cannot raise funds in the unsecured debt market. However, we expect that Harley’s funding requirements would be met comfortably by its bank credit facility, if required. Supply side & Economic Scenario Given the continued macroeconomic deterioration and tightness in credit markets, I am raising our fair value uncertainty rating for Harley-Davidson. The company’s growth has decelerated during the last three years, and year-over-year shipments were down 15% last quarter. In addition, we see significant downside risks to the contribution from Harley-Davidson Financial Services. Last quarter, financial services income was down 43% because of a $20 million reduction in securitization gains. Financial income was also affected by a $6 million write-down in retained securitization interests. Since that time credit markets have seized up, and it’s likely the firm will report increasing charge-offs on consumer loans in the coming quarters. Summary Business process reengineering is very critical for companies and industries which survive on innovation. Sometimes there are cases when old processes in the company are dying and their is a pressing need to rejuvenate then. This process of is known as business process reengineering. A company that does not innovate dies out in the market. Old operations over time die down and new process needs to be rebuilt into the system. This is where the concept of business processes engineering is very critical. 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